Will Government ever grasp the nettle of public sector pay?

Friday, February 10, 2017

Any attempt to develop a fair process for determining pay levels in the public sector is most likely to occur within the collective bargaining arena for the forseeable future, write Thomas Turner and Darragh Flannery.

IT NOW looks as if the Public Pay Services Commission (PSPC) will consider the exceptional problems of the recruitment and retention of nurses and the possibility of a special pay deal limited to nurses in the future.

Yet like its ill-fated predecessor, the Public Service Benchmarking Body (PSBB), the commission faces formidable challenges. The PSBB delivered its first report in 2002 and recommended a series of significant wage increases for most public servants based on extensive job evaluations of private and public-sector jobs.

In return for the wage increases there was an understanding that all previous pay links between public servants and sectors would be severed for good. This strategy has failed miserably, paradoxically due partly to government policies. The Financial Emergency Measures in the Public Interest legislation enacted from 2009 coupled with a series of agreements between Government and public sector unions has bound the common interests of public sector employees ever more closely together.

The underlying principles of Irish public service pay determination since the 1950s is that levels of pay should, where possible, be set by reference to direct comparators in the private sector.

In the absence of market forces the Government lacks a clear pricing mechanism to guide pay setting in the public sector — making it difficult to calculate a market evaluation of the output of workers engaged in the provision of these services. This poses a perennial challenge for government pay policy in the public sector of the economy, as too high a level of pay wastes the resources of Government increasing the burden to taxpayers, while too low a level makes it difficult to attract workers of the quality needed to provide services.

Unfortunately, there are numerous obstacles to finding direct comparators in the private sector. Few public sector jobs in areas like education, health and public administration have any true counterparts in the private sector. Broad comparisons of public/private sector earnings’ difference based on raw earnings data are commonly reported, based on data collected by the Central Statistics Office. These figures indicate the ratio of average public to private sector weekly earnings is considerably higher at more than 40% of private sector earnings in 2016 — a decline from a peak of 53% in 2009.

However, these are crude estimates and to measure the true wage gap between the public and private sectors we need to identify any observed differences in the earnings between private and public sector workers that can be explained by factors such as educational qualifications, skills and work experience. Any remaining positive or negative differences in earnings represent the true wage gap between workers in the two sectors. Our review* of the evidence from the extant studies that have employed statistical methods to estimate the gap between public and private sector wages in Ireland indicate a wage premium in favour of public-sector workers. But the actual magnitude of the earnings gap is difficult to accurately assess as the size of the premium varies markedly depending on the explanatory variables used, the way variables are specified, the particular sub-sample analysed and the statistical methodology used in the estimations.

The public sector premium generally ranged from 14% to 20% between 1995 and 2010. Recent international studies using similar methods also indicate that the earnings gap in favour of public sector workers in Ireland particularly for women is above the European average ranging from 16% to 20% between 2004 and 2010.

A number of possible options for determining public sector earnings are available to the PSPC:

First, government fiscal policy could provide broad constraints on government spending on public sector pay. Specific provisions such as multi-year ceilings on the proportion of government revenue could limit the amount allocated towards the public sector wage bill.

Secondly, increases in public sector wages could be based on current and forecasted productivity levels in the private sector and economy generally, thus aligning long-term government wage dynamics with general economic trends

Thirdly, the Government could adjust the present industrial relations arrangements of negotiating a single inclusive collective agreement with all public sector unions and opt for separate agreements with sub-sectors such as the civil service, health and education that reflected the different recruitment and retention challenges confronting each sector.

To sever the linkages between the various sub-sectors in the public sector has been tried and failed. It would require a major realignment in government policy away from the favoured single encompassing sectoral pay agreement. Ultimately, any attempt to develop a fair process for determining pay levels in the public sector is most likely to occur within the established collective bargaining arena for the foreseeable future.

*Turner, T and Flannery, D (2016) Assessing the Wage Gap between Public and Private Sector for Managerial, Professional and Clerical Male and Female Employees. Working Paper Research Series. Paper No. 01/16 August. Kemmy Business School, University of Limerick.

Thomas Turner lectures in personnel management and industrial relations at the Department of Personnel and Employment Relations, Kemmy School of Business at the University of Limerick.

Darragh Flannery is a lecturer in economics at the University of Limerick.